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Guide to Equity Compensation
- juliend2 7y agoI wish there was a canadian version of this.
- H8crilA 7y agoMost of those things are pretty international. Finance is a very old domain, and as a famous man once said (albeit specifically about speculation, but it also applies to the structure of the contracts): "There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."
- ska 7y agoCanadian isn't much different really in practice, but there isn't an 83(b) equivalent iirc. The specific tax detail vary, but from 30,000 feet it looks pretty similar. Overall it's pretty comparable to the non-SV US. There is less VC & PE money floating around (generally investment is more conservative). Common stock options or grants are going to be a gamble for the same reasons as in the US. Tax wise, you capital rates rather than normal (i.e. 50% treated as regular income). You may get a gain/loss relative to FMV in year you exercise, same as US. Most of the advice carries over directly, mutatis mutandis.
- ditonal 7y agoStartup ISOs are totally broken, and VCs and founders would rather write 30 page treatises on all their complexities (of course, glossing over the 99 ways to screw employees), than actually try to improve them. A small percentage of people got rich off options a handful of times a long times ago, and since then countless people have been screwed. Public RSUs for stock you can sell immediately on the open market are fantastic. Common ISOs are toilet paper. At a _minimum_ you should get a 10 year exercise window, and if the CEO tries to say that would make it so early employees can hurt cap tables for future rounds, he's basically saying he doesn't consider your equity grant to be real equity as it deserves to be clawed back for the sin of not wanting to stick around for the 15 years it takes startups to IPO these days. These exact same people will try to convince you that their ISOs are a valid subsitute to liquid RSUs, THEN say that they don't deserve to be "preferred" instead of "common" because the VCs put in actual money (hint: so did you if you turned down a public company to work at the startup. Biggest difference is only that you're way less diversified). Am I ranting? Of course, but if VCs and founders are going to continually "educate" engineers on their equity offers, engineers need to stand up and inform each other of the pitfalls. I know countless people, myself included, who have been screwed by ISOs. You can actually lose money because the 30 day window forces you to pay strike price + taxes on gains, then you find out that the CEO sold the company at a bargain so liquidation preference kicked in and he just took a huge retention bonus instead. The way out of this mess is not Github treatises on how to evaluate your equities. The way out is for engineers to continually tell founders/VCs that they will pick public companies instead of startups until ISOs get fixed. If ISOs screwed over VCs instead of engineers, they would have gone to DC and gotten this fixed 10 years ago. At an absolute minimum you shouldn't have to pay a dime in taxes until you've actually realized some money in your checkings account. VCs/founders don't care because they don't have to care because engineers are still too gullible and accept these bogus deals.
- ng12 7y agoExactly this. As far as I'm concerned the purpose of ISOs at companies more than a year old is to trick junior engineers into accepting a lower salary than they would receive elsewhere. Unless you have at least half a percent of a company you really, truly believe in I'd just ignore this article and put the value somewhere between $0 and a roll of lottery tickets.
- UncleMeat 7y agoWorse, as OP states, they can cause you to lose money. They can be worth less than zero dollars. Pay piles of taxes on the exercised options and then watch the company get gutted and preferred investors take everything.
- pjbk 7y agoSadly, examples from the dotcom burst and housing crisis abound. It's a double edged sword. I have always preferred to go for early exercising. "Many of these workers now owe far more in taxes than their stock is worth. Former Cisco engineer Jeffrey Chou, 32, owes $2.5 million in taxes on company stock he purchased last year that has since withered in value. Chou figures that if he were to sell everything he owns, including the three-bedroom Foster City, Calif., townhouse that he shares with his wife and 8-month-old daughter, the family still could not pay the bill." * https://www.chicagotribune.com/sns-tech-taxes-story.html https://www.chicagotribune.com/sns-tech-taxes-story.html
- andrew311 7y agoSelling private shares / options on the secondary market is near impossible if the company isn’t on something like SecondMarket. Right of First Refusal, Co-sale Agreements, and the challenges of sharing information with a 3rd party make this difficult. That said, has anyone succeeded and written about their experience?
- djannzjkzxn 7y agoIt’s hard in theory, easy in practice if your options are worth millions. I have friends who did it. I don’t know too many of the details but they made some kind of contract with a financial firm to sell the upside from the stock without actually “selling” the stock. The fees are not terrible, like single digit percentages. These firms don’t want to talk to you if you have a small amount of equity because it isn’t worth the overhead to make a transaction.
- tempsy 7y agoNo it’s not. If that were true none of these marketplaces would exist.
- andrew311 7y agoI should clarify that it is certainly doable for widely recognized companies, but it’s very difficult for the majority of startups that no one has heard of even if they have some success. Also, getting on these marketplaces also goes much better with company cooperation and many startups don’t have the time or willingness.
- spurdoman77 7y agoIf company is valuable enough smart investors will flock around the shareholders who even have very minor ownership. I was sceptical at first but then saw it happening with a profitable company I was following. I thought people were stuck with their shares, but since the company was profitable it attracted investors looking for better returns than public stocks.
- 7y ago
- corporateslave5 7y agoBasically everyone knows by now, being an employee at an early stage startup is a suckers bet. You’re literally working to make someone else rich. Just go work for FAANG, or highest cash comp, and jam that money into tech stocks.
- majormajor 7y agoIt sucks if you want to work on new ideas, and not just be a cog in a giant machine, but don't have an idea of your own you think is worth founding. The money is the trade-off for the big corporate shenanigans and relative lack of intrinsically motivating work.
- ska 7y agoThis is often true from a raw compensation point of view, but it isn't as if the jobs are fungible. Nothing wrong with deciding a startup is best for you, so long as you are going into eyes open and don't believe some nonsense like "the options will make up for the salary difference".
- tempsy 7y agoI got lucky though at 2 startups, and day to day probably a lot more interesting than working as another cog in a big co. Definitely made more than I would’ve given my level.
- sub7 7y agoI did 3 stsartups as an early employee. First raised 27M then acquihired, common stock wiped out. Second is still going strong and profitable, my 2 years there will probably net me a few 100k. Third was a home run, my 6 years there made me $10M+ and I now have secondary firms chasing me for a piece. Startups can work, but you need to be really good and get really lucky and not stop after a failure.
- jacobschein 7y agoSo many of my friends have been screwed over by the technical nuances of equity compensation. Started Compound (https://withcompound.com https://withcompound.com) to solve this problem (we generate personalized analyses to help you understand your equity – tax implications, potential value, etc). If you have any questions/feedback, email me: jacob@withcompound.com.
- wtvanhest 7y agoJust out of curiosity, how does compound make money?
- deleted 7y ago[deleted]
- daenz 7y agoI worked for a startup founder and personally watched him screw advisers out of stock agreements using different tactics, from technicalities in the agreements to outright not honoring the agreements when he knew it was disadvantageous for them to pursue him legally. He gloated about it and would speak very highly of all the ways he could manipulate situations. In the end, I left and the startup went under, and I told him directly that I didn't trust him (to his surprise). The lesson that I learned was that I'd be a fool to take equity in a startup, given all the ways I could be screwed, and my lack of resources to pursue any legal recourse. Cash only, from now on.
- fossuser 7y agoI think this is the wrong lesson and people are generally too extreme when valuing this. Are there risks with ISOs? Yes. Should you value them 1:1 with cash? Probably not. Should you value them at $0? Probably not. People should make decisions based on the company, what they're doing, and how much they trust the board/founders. It'd be a mistake to categorically dismiss equity since that's the best way to leverage your human capital into wealth. It's also a mistake to think that equity is valued exactly at what the company is advertising it as when trying to hire you. There's some risk, but engineers should consider their options.
- cbhl 7y agoI think the first thing someone should consider when looking at jobs is their risk tolerance. If you don't have two parents who are alive and healthy and own their home mortgage-free, you probably have a low risk tolerance. Go work at a FAANG; ISOs have an effective value of $0 to you. If your grandpa can afford to give you $10000 to start a startup, or if you can always move into your parents' basement when you become broke, then I would think about a startup. You can tolerate owing hundreds of thousands in taxes in the worst case, and the higher expected value (and higher personal growth, in the early years) is worthwhile.
- jldugger 7y ago> In the end, I left and the startup went under, and I told him directly that I didn't trust him (to his surprise). A classic example of an individual who would be 10x richer if they were 10 percent less greedy.
- mmxmb 7y agoAnother good resource: https://www.holloway.com/g/equity-compensation https://www.holloway.com/g/equity-compensation
- QuinnyPig 7y agoIt’s the same data, built by the same person (jlevy).
- dang 7y agoOnce weisser pointed out that they're the same (https://news.ycombinator.com/item?id=22388314 https://news.ycombinator.com/item?id=22388314) we changed to that URL from https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation.
- deleted 7y ago[deleted]
- m0zg 7y agoBest advice would be: don't do this yourself. Hire a lawyer, have them redline your stock compensation agreement. Cost depends on complexity, but regardless of complexity it's insignificant in comparison to getting screwed by e.g. vested stock repurchase rights, or not being able to exercise vested stock if you're fired (which you likely will be, if the situation calls for screwing you out of your vested shares, particularly if you stand to get a lot of them). I paid less than $500 for the review. Initial version of the agreement pretty much guaranteed I'd be screwed under all sorts of circumstances: from leaving on my own, to getting fired for (possibly made up!) cause, to company getting acquired. If the prospective employer does not agree to the redlined version, walk away. The founders and their lawyers will tell you it's what everyone else signs, but don't believe that for a minute: founders and investors themselves have different agreements, and "everybody else" are idiots if they sign something as important as this without a legal review. Remember, once that startup is worth something, that's when the knives come out. And come out they will if your agreement is not 100% ironclad, which is not something you can do yourself.
- kevinskii 7y agoTbis is very good advice. When I applied to some startups a few years ago and saw the kinds of equity games they were playing, I decided I would never accept a substantial equity offer without first having it vetted by a lawyer. Even if you take the time to learn about ICOs by reading guides like this one, there are just too many ways to be taken advantage of.
- harryh 7y agoThis is bad advice for the vast majority of startup employees (basically anyone who is not an executive, and even most executives) because companies (rightfully so) will not accept redlined stock agreements for individual employees. In which case the employee will have paid a lawyer a bunch of money for for nothing in a way that is entirely foreseeable. Deciding that working at a startup (with the comp structures that come with that) isn't right for you? Totally fine. Startups aren't for everyone. But don't go waste money on a lawyer who's work will 100% for sure just get thrown in the garbage. TBH any lawyer who even takes this work is either bad (because they don't realize the work is a waste) or a scammer (because they know and don't care).
- weisser 7y agoThis is the old version of The Holloway Guide to Equity Compensation which you can read here for free: https://www.holloway.com/g/equity-compensation https://www.holloway.com/g/equity-compensation
- dang 7y agoThanks! We've switched to that from https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation above.
- cletus 7y agoSo the tl;dr is: 1. Startups take longer to IPO, if they ever (objectively true); 2. Liquidation preferences for VCs and preferred stock for founders may make a certain amount of sense (other comments have addressed this) but given (1), this is generally a horrible deal for employees. 3. Any employee should outright refuse to join a startup where the agreement has any kind of clawback or any exercise period less than 10 years after the termination of employment. If you're worried about diversity of ownership then put in a right of first refusal into the contract. That's fair. 4. E(TC) for a moderately qualified SWE at Big Tech is >$350k. Given all the above if E(TC) at the startup really needs to be at least twice that (hint: it isn't). 5. For every story of a Google chef becoming a millionaire there's 10 stories of a Mark Pincus type who threatens to fire employees if they don't surrender some of their (unvested) options.
- zalzal 7y agoJosh here (one of the authors). Do also feel free to read the latest version of this at https://www.holloway.com/g/equity-compensation https://www.holloway.com/g/equity-compensation It's the same source as what you can find on GitHub but at Holloway we're working to make long-form docs like this easier to read on the web. PRs or feedback here on the Holloway reader welcome. :)
- zyxjih 7y agoIs there any way to confirm that the IRS received my 83(b) and processed it correctly?
- harryh 7y agoSend them two copies as well as self addresses stamped envelope and a letter requesting them to date stamp one copy and send it back to you. They will do so.
- fhrow4484 7y agoRegarding private companies' RSUs, anyone here has heard of a company eligible for and opted-in 83(i) elections? (Which lets the employee defer tax for up to 5 years)
- crimsonalucard 7y agoIt should be known about a thing called clawbacks. If you don't read the contract they could write something where that if at anytime you exercise they reserve the right to buy back what you exercised. A FinTech company I worked for use to do this. To my surprise even the finance guys were in the dark are about the whole thing... nobody bothered to read the contract. The company is called Neptune Financial and basically every employee who works their is screwed in terms of equity compensation.
- foobiekr 7y agoOne of our potential investors pressed this very hard: “if they don’t stick it out, why should they get paid?” and so on. We rejected them and went with someone sane. but I was shocked. this was coming from an upper-tier VC firm. One thing I am happy about is we never took bad money. Our series A firm was fantastic.
- crimsonalucard 7y agoI'm ok with that reasoning if you do something like a vesting period with a cliff at IPO. Make it clear tot he employee that the deal is... the employee only gets something if they stick it out. The thing with clawbacks is it's 100% deception. The 1 year cliff and vesting are all deliberate lies and manipulation.
- foobiekr 7y agoI would not be OK with this policy even if it was spelled out, doubly so because it was a prospective series C investor that wanted it added to the existing (retroactively) and future options agreement. People often convince themselves that startups will IPO or whatever because that's a pre-requisite for joining one. People don't always make great decisions. Part of being a good person is accepting that caveat emptor is not an ethos that people should embrace. I talked with an engineer - most excellent - who was employee 1 at a startup that, at one point, became worth close to a billion dollars. He did not early exercise because they flubbed their 409a evaluation and his share would have been a $100k+ commitment at the time, and he'd just come out of two startups back to back that had failed after he'd EE'd and gone to zero. At year 6, he was absolutely almost ready to gnaw his own leg off, but he stuck it out to the IPO. He was absolutely miserable, he wanted to go. They would not convert his shares to NSOs and he could not afford the multi-million dollar tax bill he'd receive if he ee'd then. Good thing, though. It was grueling but he got through it and they did IPO. And then they crashed to essentially zero before the lockup expired and he got essentially nothing.
- wdb 7y agoEquity compensation is like your bonus. The chance you are getting it is low so shouldn't be taken into account. Maybe I have burned too many times by discretionary bonuses :)
- kccqzy 7y agoThis definitely differs but many companies give out annual bonuses to pretty much everyone.
- wh1t3n01s3 7y agoThe point here is that the bonus is given if the company is making profits
- wdb 7y agoMy experience they always come up with a reason not give you a bonus. Hence I never consider it to get it. So when a company says we can't offer X but you get 10% bonus each year so you make your old salary Y. I will just pass because I will end up taking a pay cut
- auspex 7y agoI have had a number of successful exits but the bottom line is that you're (probably) not getting nearly enough options to offset the risk. Pasted from a comment I made in an earlier thread: 80% of startups fail and 20% succeed in some fashion. Which means if you normally make $50,000 and take a $5,000 paycut (no rsu) to work there you will lose $20,000 over the 4 year vesting period. 80% of the time when the startup goes bust you make 0 on equity and still lost money due to the paycut. For a total of 8x20 or $160,000 loss. The two times you are successful you make 2xEquity. This means your equity has to be at least worth $80,000 each time you succeed.... just to break even. Factoring in the risk of your equity being 0 you should be getting a LOT more equity. It's very similar to calculating expected value in poker.
- GeneralMayhem 7y agoDoing EV calculation with personal finances is also tricky, because you don't get repeated trials. In poker, assuming you have an appropriate bankroll, you should be able to make risky but positive-EV bets hundreds of times, such that you will realize that EV. For job choices, you're not going to get more than a few cracks at it. You really need to be more concerned with risk of ruin, especially when the ratios are greater. The difference between FAANG and early-stage startups can easily be a 50% pay cut, with at least 5 years until liquidation. If you have a 50% chance of that bet paying off, then maybe it's okay - you can do this twice a decade, and you're reasonably likely to end up at least even over a career. If you have a 5% chance of the bet paying off, even if the rewards are large enough to make the EV even or positive, that's an insane amount of risk to take unless you're already financially independent, because over a career you're not likely to win even once. This is one of the fundamental power imbalances between labor and capital: Capital can diversify. To go back to the poker analogy, VCs are playing cash games - they can take 100 bets of which they expect only 2 to pan out. Employees are in a short-stack tournament - even if you make the highest-EV play, if you're going to lose most of the time, you shouldn't be going all-in.
- auspex 7y agoI really like the cash game vs. short stack tournament analogy.
- ycombonator 7y agoWhat’s a typical equity compensation for a mid level contributor in a post series A company ? Val ~ 30mm
- sk5t 7y agoGiven nothing more to go on, maybe 5 to 10bp.
- emersonrsantos 7y agoHow about LLCs? Any guide?
- sbilstein 7y agoAs always, the best time to join a startup is when it’s raised several rounds and you are at least a staff engineer. You’ll get a million or more over a four year vest and much higher chances of IPO which if it’s good, it may 2-10x your stock.* Unless your Uber and than a lot of those folks got fucked. Shrug.
- usaar333 7y agoAgreed on later stage; disagree on need to be that high level. High growth companies are actually better for lower leveled engineers as they can grow faster.
- jaz46 7y agoI think the biggest gap that this guide and every one I've seen like it that they undersell the positive value for employees of the Restricted Stock Award (RSA). RSAs can be significantly better than ISOs in many situations. There is no actual reason why companies can only offer RSAs to founders and super early employees. The taxes get trickier once the strike price gets high enough, but employees should have the choice to maximize their equity value! From the very beginning of founding my company and still 5 years later, we offer our employees the choice to take their stock as RSAs, options, or a combination of the two. We also teach a mandatory "Stock 101" course every quarter for new employees that is a 1.5hr version of this guide. Too many employees' (engineers in particular in my experience), don't actually understand how their equity compensation works and I think it's the responsibility of the company to educate them -- both for their current role and possible future job offers.
- choppaface 7y agoCan you offer any details on the tax consequences of offering ISOs versus restricted stock? While there has been a ton of discussion of tax consequences for employees, the corporate incentives are less clear and yet understanding them is probably key for progress here.
- pfarnsworth 7y agoThe playbook for Equity compensation has changed dramatically in the last 20 years in drastic favor of the founders. During the dotcom days, the number of shares that were given out was very generous. I know secretaries that made enough from IPOs in the late 90s that they could retire and buy a vineyard. Meanwhile I was a relatively early employee at a YC startup that had a successful exit. The founders made 8 figures and I made about 80k over 4 years. I would have made 10x more at a FANG with a regular comp package.
- qaq 7y agoThe prevalent advice here is don't invest in individual stocks, even though in general you have a ton of information on a public company from financials to track record of key players to good market and product info. With startups it's suddenly OK to invest often half of your potential money into a stock surrogate with none of the above. There are many reasons to join a startup striking it rich from equity is def not a good one.
- burnJS 7y agoThis couldn't have been posted at a better time for me. I've been talking with some people more in the know on this and was advised by someone to ask for a revenue share in addition to my equity. This person felt the equity offering was low and I should protect myself with a revenue share. Does anyone have resources or additional insight on rev share agreements?
- xivzgrev 7y agoThis piece is bullshit “RSUs are often considered less preferable to grantees since they remove control over when you owe tax.” Who the fuck cares when you pay tax? A small % of people will have enough value to worry about that. The vast majority of people tho have a bigger worry: the stock is worth less than what they pay to exercise, because when you leave your company you have to exercise em or lose em. Dual trigger RSUs solve that. I don’t have to pay a freakin’ dime whether I stay or leave. I keep my vested RSUs and ride off into the sunset and if they someday become worth something, the company just withholds some shares to pay the tax. Again no up front cash when I leave the company and no large tax bill. AND I get to keep the whole value of the share. For ISO you only get delta between exercise price and strike price. If my RSUs are $5 or $15 apiece who cares, it’s all risk-free gravy / upside. If I have ISOs I’m worrying about strike price and whether it’s worth it to exercise. I don’t know who in their right mind would want ISOs over RSUs.
- sp527 7y agoThere should be a federal law prohibiting issuing any type of equity compensation (including options) without also routinely reporting relevant details (ownership %, FMV, dilution, preferences, etc) to holders. The single biggest problem with options is that the cap table is completely opaque to employees and the founder is incentivized to operate as a lying sack of shit redlining the reality distortion field.
- borski 7y agoISO + early exercise + 83(b) election + QSBS treatment is a massive win as an employee. Very favorable tax treatment, but you have to early exercise, when the strike price is equal to the FMV. If it were me, and I believed in the company, I would value the equity highly, but make sure I negotiated a signing bonus or similar that allowed me to early exercise. The 90 day window doesn’t matter in that situation, although I will grant you that everyone’s financial situation is different, and that having to pay for the stock at all is a drawback. You also have to trust that the founders are going to have your back and not screw you. This is a judgment and personality call. Context: sold my company a month ago, all employees with options that had early exercised got full acceleration, and even unexercised optionholders were paid out as if they had exercised and been fully accelerated (though did not get similarly preferable tax treatment, obviously). Treating the employees properly (and well) was a massive part of the negotiation.
- yread 7y agoIs there a guide like this for founders? Or late coming cofounders, early c-levels?